Is Your Business Protected From Fraud?

Can your business survive a $200,000 embezzlement or other fraud scheme?  What if that scheme was spread out over 10 or 15 years?  Would you notice?

Denise, a $35K a year bookkeeper, for a small trucking company in Alabama is facing several years in prison for embezzling over $550,000 from the company.  What did Denise do with all this money?  She spent it on cosmetic surgery, new cars, luxury vacations, and jewelry.  She was living the high life.   

I am sure most of us remember the name Gus Gorman.  He was the character played by Richard Pryor in Superman III.  How did he get caught?  Well, he was stupid.  He showed up to work in a new Ferrari.  Unfortunately, most fraudsters do not give themselves up like this and many employers may not even notice.

Denise got caught not because of the huge sums of money that she was wiring out of the company account into her own, but because she changed her annual salary from $35K to $38K.  When the owner of the company noticed this small discrepancy, it was the beginning of an investigation that kept growing and growing. 

Like this trucking company, most small businesses lack fundamental controls to prevent and detect fraud.  Denise was responsible for all of the accounting and bookkeeping functions except the physical signing of checks.   Denise would periodically wire funds from the company’s account to her own account.  When the bank statements came, she would reconcile them, burying the wire transfers into an expense account and then destroying the evidence – the bank statements.  Since the owner did not review the bank statements – he was none the wiser.

What are some steps that you can take to prevent fraud in your business?

1)      Education:  Educate yourself and your employees.  You can do this in house or have a fraud specialist come in and provide the training for you.

2)      Internal Control Review:  It is critical that all businesses have the proper internal controls relative to their size.  Depending upon the size of your company, you may not be able to segregate all of the duties, but you should segregate as much as possible.

3)      Cash Reviews/Reconciliations:  It is important that cash is reviewed and bank statements are reconciled by a party that is not involved in the other aspects of the accounting process.

4)      Pre-screen Employees:  Because of the perceived cost and time involved, many small businesses do not properly screen employees prior to hiring them.    This could include checking work references, criminal records, credit reports, drug screening or other screening procedures.

5)      Balance Trust properly.  Ronald Reagan called it, “Trust, But Verify.”  Mark Twain said, “Trust everybody, but make sure you cut the cards.” 

6)      Seek Professional Assistance.  As your company grows make sure that you setup the proper controls to safeguard yourself.  If you are unsure about how to do this, consult with a professional.

There are two things that must exist for an employee to be driven to commit fraud – motive and opportunity.  As business owners, we must set up a proper system of internal controls to limit the opportunity as much as possible.  

Motive is difficult to set controls around.  According to legend, there was a loyal bookkeeper that has been with a Company a number of years.  He requested a $100 per month raise and it was denied.  The bookkeeper methodically stole from the Company for the next 20 years, until he retired.  His replacement discovered an amazing fact.  The retired bookkeeper had pilfered exactly $100 a month.

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